How Stock Options Turn Into an Accounting Trick

It's certainly good news for investors that bellwether companies such as General Electric(GE Quote), IBM(IBM Quote) and American International Group (AIG Quote) have announced that they will release more detailed information on their financials.

The changes will include more detail on the performance of individual business units, gains and losses from the sale of assets, and off balance sheet partnerships. It's unlikely that the extra information will be enough to enable investors to easily understand these three companies -- the authors today of truly inscrutable financial statements -- but it's a start.

Unfortunately, no CEO is volunteering to take on the biggest accounting issue hanging over U.S. companies and their stocks right now. Today's accounting rules for stock options make up the most powerful tool available for manipulating earnings. Stock options accounting is the 800-pound gorilla lurking in every discussion of accounting reform taking place right now: Everyone knows the issue is too big to ignore, but everyone worries that a serious fix would take down the entire technology sector -- and perhaps more.

That's not to say that absolutely no one is talking about it. Jeffrey Skilling, former CEO of Enron, brought up the topic at his recent appearance before the Senate Commerce Committee. Taunted by California Democratic Sen. Barbara Boxer for defending the right of a CEO to use his company's stock to improve his company's reported earnings, Skilling shot back that companies do it all the time. "You issue stock options to reduce compensation expense and therefore increase your profitability." ...